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You know those satellite photos of North Korea at night, where all the surrounding countries are lit up, but the communist country is pitch black — except for a sprinkling of tiny lights in the government capital?

That black patch in the photos represents grinding poverty and near starvation for millions of people, suffering under the most market-hostile government in the world, but the bright area to the south shows that there is an alternative, a way out of the darkness.

The two Koreas are just one of history's “natural experiments” in comparative economics. We can draw similar contrasts between East and West Germany or between Hong Kong and Mainland China.

"Such grand experiments of political economy would be magnificent," writes economic historian Robert E. Wright, "were they not the root cause of untold human suffering."

Unfortunately, Wright informs us, there's a similar experiment taking place in America's Great Plains — between the mostly white population of South Dakota and the American Indians still living on government-run reservations.

More than two Dakotas

South Dakota is, "by many measures," says Wright, "the economically freest polity in North America, including all US and Mexican states and Canadian provinces."

In 2013, CNBC's annual survey America's Top States for Business  ranked South Dakota number one, adding,

South Dakota's economy, while often overshadowed by its oil-booming neighbor to the north, finishes a solid sixth. State finances are strong, the housing market is recovering, and the unemployment rate is among the nation's lowest.

But the Indians on South Dakota's reservations aren't experiencing anything like the economic progress of their non-native neighbors. They are "among the poorest of the nation's poor."

Cultural obstacles

Unlike history's experiments in Asia and Europe, the two populations of South Dakota aren't as geographically isolated from each other (Wright describes the geography as "'checkerboarded,' meaning that plots owned by natives and subject to tribal law intermingle with lands owned by non-natives"). Neither are they as culturally similar as are East and West Germans or North and South Koreans.

But while Wright acknowledges that some of the Indians' economic obstacles may be cultural — "Like other poor people throughout the globe, many Lakota are perhaps too eager to help others and face tremendous social pressure to aid their ne'er-do-well relatives" — nevertheless, "cultural obstacles pale compared to the restrictions the Federal government imposes upon reservation Indians."

Federal aid

NativeAmericanNetRoots.net, which describes itself as "a forum for the discussion of political, social and economic issues affecting the indigenous peoples of the United States," blames the Reagan administration for its "drastic reduction in federal assistance to Indian tribes," arguing that the cuts seemed "intended to hinder their ability for economic development on the reservations."

But Wright contends, citing economists William Easterly and Dambisa Moyo, "giving aid to poor peoples has never sparked economic development."

"What does get economies moving," he adds, "is freedom, something the Lakota haven't enjoyed since well before the Wounded Knee massacre in 1890."

Natural resources

The contrast between the natives and non-native populations of North Dakota may be even starker, but Wright focuses on South Dakota in order to avoid the common misconception that economic development is driven by abundant natural resources.

In 2013, North Dakota's economy was growing five times faster than the rest of the nation, but much of that growth can be attributed to the energy boom from fracking. South Dakota, on the other hand, "has none of North Dakota's fossil fuels, so it has to get by on the wits of its entrepreneurs."

In fact, North Dakota's abundant natural wealth may end up hurting that state's economy in the long term, if history is a guide. Fareed Zakaria writes in The Future of Freedom: Illiberal Democracy at Home and Abroad,

Wealth in natural resources hinders both political modernization and economic growth. Two Harvard economists, Jeffrey D. Sachs and Andrew M. Warner, looked at ninety-seven developing countries over two decades (1971– 89) and found that natural endowments were strongly correlated with economic failure. On average the richer a country was in mineral, agricultural, and fuel deposits, the slower its economy grew — think of Saudi Arabia or Nigeria. Countries with almost no resources — such as those in East Asia — grew the fastest.

Federal obstacles

If South Dakota's economy doesn't offer us as dramatic an example as West Germany, South Korea, or Hong Kong, that may be because the state government can only remove so many obstacles to entrepreneurship. More and more of the economic hurdles come from the federal government.

But despite Washington DC's growing "regulations and red tape that increase the cost of doing business in our state and beyond," as South Dakota's Senator John Thune wrote in 2012, federal authority in most of the state isn't nearly as great as it is on the reservations, and it's the federal government that Wright ultimately blames for the plight of South Dakota's Indians:

Lamentably, few Indians in the Dakotas hold clear title to any real estate. Due to past Federal policies, most own only small fractions of land in partnership with hundreds of others. ... Traditional lenders understandably want nothing to do with such complexities and until recently natives have found starting their own financial institutions daunting if not impossible. . . .

More importantly, no Native American can trust the Federal government or its self-serving Bureau of Indian Affairs. Indian entrepreneurs, who are increasingly numerous, keep their operations small because they believe, rightly, that the government may not respect their property rights should they prove too successful. Reservation land remains subject to seizure and exclusive economic privileges, like casino gambling rights, have already been eroded in some states.

The natural course

If Native Americans are ever to emerge from systemic poverty, it will not be from federal aid, from "five-year plans," from striking oil, or even from casinos. They will find prosperity on the path already taken by South Korea, West Germany, and Hong Kong — a path charted already in 1755 by Adam Smith:

"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things."

And no person or group will need their "affairs" managed by a federal bureau to follow it.

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